US Airline Industry Becomes Profitable In 2010 As Traffic Recovers, Pricing Firms, And Labor Strife Decreases: Significant Stock Price Upside Forecast By Experienced Sector Analyst
November 30, 2009 - The Wall Street Transcript has just published Travel and Leisure--Airlines, Hotels, Resorts, Cruise Lines, and Restaurants Report offering a timely review of the Airlines sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Michael Derchin is an airline and aerospace Analyst with FTN Equity Capital Markets Corp. Prior to joining FTN Equity Capital Markets in Sept. 2006, from 2000 to 2005 he was Chief Investment Officer of Derchin Management, Inc., a long/short hedge fund focused on bottom-up fundamental research of consumer and industrial securities. From 1995 to 2000, he was Managing Director and Head of Tiger Management's transportation research team.
Mr. Derchin began his Wall Street career at Oppenheimer and Co. in 1979 as an airline Analyst, followed by stints at The First Boston Corp (1982-1988) and Drexel Burnham Lambert (1988-1990). He was Director of Research at NatWest Securities, where he managed 90 investment professionals from 1990 to 1995 and headed its global transportation analytical research team.
Mr. Derchin began his business career at American Airlines and worked at Pan American World Airways. As Director of Marketing Planning at American Airlines, he was heavily involved in many ground-breaking programs introduced during the early years of airline deregulation. Mr. Derchin has testified before the Senate Aviation Subcommittee, was a past member of the Aviation and Space Writers Association and is widely recognized as one of the leading experts in his field. He received a B.A. in economics from Brooklyn College, and an MBA in finance and investments from the City College of New York. Mr. Derchin has also conducted doctoral (ABD) work in business administration at Syracuse University.
TWST: Let's start with a general outlook for the U.S. airline industry.
Mr. Derchin: Our outlook for 2010 is positive. We're coming off a very difficult two years, which included very volatile fuel prices, a deep global recession and major credit crisis. The airlines have certainly been tested over the last couple of years. All the major ones have come through in relatively decent financial shape. Having been able to raise billions of dollars to boost liquidity, the airlines are, by airline leverage standards, on sound financial footing going into 2010, which we think will be a better year from an economic standpoint.
In looking at the key earnings drivers, capacity is under tight control, growing at most very modestly. We believe that demand will recover, not in a huge way, but certainly off of a very weak 2009. We believe that because of a better balance between supply and demand, we're going to start to see fares going up, particularly in the domestic market. And we believe that as long as fuel remains high, we're going to be in a rising fare environment over the coming months. On the cost side, we see continuing problems in oil.
We are looking for jet fuel prices to be higher in 2010 than in 2009, averaging about $90 per barrel. We see the airlines making a concerted effort to try to reduce non-fuel unit costs which they can control, which will be a little bit easier when you're not shrinking as much as they have. To sum up, we are looking for 2010 to be a modestly profitable year for the industry, setting the stage for a nicely profitable year in 2011 and beyond, assuming the global economy continues to recover.
TWST: So you believe profitability will come back for the airlines?
Mr. Derchin: Yes, we do. It's been a few years since the airlines made money as a group.
As you know, this industry has two components to it: the traditional network airlines, who have been losing money throughout the recession, and the low-cost, primarily domestic airlines, who actually have been making money despite the recession. And so what we see occurring next year is the low-cost carriers making more money than they did in the recession and the network carriers moving from red ink to modestly black ink. That, by the way, assumes that jet fuel averages about $90 a barrel, which is up from roughly about $80 in 2009. So it does assume an increase in oil prices, but not a horrendous one.
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